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Smaller Food Retailers More Profitable Than Larger Chains Last Year

WASHINGTON, DC -- Food retailers with sales under $100 million posted six-year highs in net profits (1.45 percent) and return on equity (20.38 percent) in fiscal year 2003-2004, according to research released by the Food Marketing Institute here.

March 14, 2005, 07:00 pm

WASHINGTON, DC -- Food retailers with sales under $100 million posted six-year highs in net profits (1.45 percent) and return on equity (20.38 percent) in fiscal year 2003-2004, according to research released by the Food Marketing Institute here.

According to the report, FMI's 2004 Annual Financial Review, released yesterday, net profit for the total industry declined to 0.88 percent in the period, from 0.95 percent the year before. The industry's overall performance was dragged down by results posted by large food retailers, particularly those still recovering from the prolonged labor strike in southern California, FMI said.

In addition, health insurance costs increased 19 percent in 2003-2004, and a majority of the retail companies surveyed for the report said they expect further increases of up to 14 percent in the next fiscal year.

"Without a doubt, this is a tough, competitive market," said FMI President and c.e.o. Tim Hammonds. "Companies are squeezed by fierce price competition and continued double-digit increases in the cost of heath benefits -- a major expense for an industry as labor intensive as ours."

"Most encouraging, however, is that many retailers are finding solutions," he said. "Supermarkets are continuing to find ways to operate more efficiently, as reflected in reduced inventory levels and strong asset turnover rates. And the top performers are investing in technology, consumer service, and new products that should sustain growth in the years to come."

In the survey, 90 percent of retailers said they are optimistic about their future economic outlook, with 35 percent saying they are "very optimistic."

Among the most significant findings for fiscal year 2003-2004: Earnings before interest, taxes, depreciation, and amortization (EBITDA) -- regarded by many as the truest measure of operating performance -- were 4.20 percent, down from 5.08 percent.

Return on assets (ROA) -- reached 3.20 percent, up slightly from 3.04 percent, and Return on equity (ROE) was at 9.4 percent, from 10.6 percent.

Reflecting increased efficiency, inventory levels declined to a five-year low at 20.6 percent of assets, as did accounts payable, which dropped to 15.8 percent.

Many companies improved their liquidity with cash as a percentage of assets up to 6.6 percent, from 4 percent in 2002-2003.

Long-term debt continued to decline, to 37.1 percent of assets -- two points lower than the two previous years. The debt-to-equity ratio also dropped slightly, to 2.3, from 2.4.

"Altogether," said Hammonds, "these results show that the industry is repositioning itself for growth. The most progressive retailers are learning how to prosper in a largely price-driven marketplace."

Retailers searching for pathways to success can find the benchmarks in the report's financial profile of the top 25 percent profit leaders. Their after-tax net profit was 3.5 percent and EBITDA 6.7 percent.

"Most telling," said Hammonds, "the profit leaders reported holding less cash than their less profitable counterparts (4.5 percent) -- mostly likely because they have made significant capital expenditures investing in their future, spending nearly twice the industry norm at 4.2 percent."

The 2003-2004 Annual Financial Review is based on data from 166 companies operating 12,789 stores totaling $253 billion in sales, or half of all U.S. retail food volume. Data are broken out by company size and by profit leaders.